With so many commercials and infomercials promising real estate buyers quick riches in foreclosures and short sales, I felt it might be appropriate to write a blog from the vantage point of the homeowner who is considering a real estate short sale. Every homeowner has options, regardless of what they might believe after talking with their lender.
What Is A Real Estate Short Sale?
If somebody sells a home and the proceeds (money) at closing are not enough to cover the mortgage(s) on the property, this is known as a short sale (as in the proceeds fall short of paying what the owner owes). Due to falling real estate prices, many homeowners who recently (last two years) purchased or refinanced their home now owe more money on the home that it is currently worth.
Perhaps you know somebody who has been layed-off recently, or maybe somebody in a divorce situation where the end result is that they can no longer afford the monthly mortgage payment. They try really hard to keep current, but over a period of time they get to a point where they are far enough behind that the mortgage company is calling them all of the time and demanding that they become current….OR ELSE!
Every homeowner has four options in today’s real estate market (and every real estate market for that matter). They can
- Stay in the home
- Lease the home to a tenant
- Sell the home
- Give the home to the bank (deed in lieu of foreclosure, foreclosure, etc)
Since this blog is about real estate short sales, we’ll leave options 1, 2, and 4 to later writings. A short sale would fall under number 3, when the homeowner decides to sell the home.
The homeowner cannot not unilaterally decide to do a real estate short sale, rather he or she must get all lien holders to agree to the situation. For this to happen, a negotiation between the bank(s) and the homeowner must occur. The bank might desire a short sale if it feels it is the most profitable action and the homeowner might consider a short sale if the homeowner receives assurances from the bank(s) that no deficiency judgment (or a limited one) will be recorded. This would allow the homeowner to “move on with their life” rather than to continue to owe a great amount of money for a long period of time. Additionally, most banks spend enormous amounts of time and money on foreclosures and would most likely do better with a quick, short sale.
Should You Sell Your Home Through A Short Sale?
Everybody has unique situations and complex reasons for doing what they are doing. This blog article cannot give simplistic advice for these complex scenarios, but it can offer some thoughts to consider when making a decision on whether or not to participate in a short sale. Some of the questions that we ask clients who are considering a real estate short sale include:
- Do other options exist that would allow the homeowner to stay in the home until its value rises above the mortgage amount?
- Is a sale the only option?
- Is the value such that a sale would require a real estate short sale?
- Has the bank or lender offered any advice?
- Will the lender modify the loan?
- Is the homeowner in a position to borrow funds from family or friends to help satisfy the mortgage (or bring it current)?
- Has the lender agreed to participate in a short sale?
What To Ask Your Short Sale Expert
One of the smartest steps that you can take if you find yourself considering a real estate short sale is to meet with an expert on the process. While most real estate companies claim to be experts in the short sale process, I find it rare to talk to a company that has handled more than a few short sales. Just as in every specialty area in any industry, the key for the homeowner will be to speak with the most qualified real estate company to successfully work through the real estate short sale.
In order to determine whether or not the company is truly qualified (remember, most real estate agents have conversational experience with short sales, therefore you have to be diligent in your research), here is a list of key “Do-s” and “Don’t-s” that you should utilize:
- Real Estate Short Sale Homeowner Checklist
Utilizing the services of a real estate company with extensive background and training in real estate short sales is very likely the difference between you enjoying a successful closing and you having to agonize over a troubling foreclosure process.
The next section addresses the process required to successfully achieve a closed short sale. Regardless of what anybody else tells you along the way, know that the process is uncertain and is most likely going to be stressful if you believe it to be easy.
How Does The Real Estate Short Unfold?
Make no mistake about it, nobody ever loaned money to a homeowner with the expectation of accepting less than the full principal portion due on the note. Because of this, I suspect no bank or lender has a well-oiled, organized short sale process. Each one requires individual attention with the focus on the homeowner’s situation and the homeowner’s ability to repay the loan.
A real estate short sale takes typically two to six times longer than a normal, arms-length sale because the bank must make a decision on whether or not to accept the short sale. From the buyer’s vantage point, it is as if the contract must be ratified by two echelons in the Sellers’ camp. First, the homeowner must agree to the contract presented by the buyer. Once done, then the bank must agree. This is usually done on a case-by-case basis with the bank being ever-vigilant in protecting its investment. And this is the very reason that it is imperative to have the right real estate company assisting the seller (and the buyer for that matter) in concluding the real estate short sale.
As most lenders must consider similar issues in each unique short sale scenario, the prudent real estate company will already have prepared a short sale package that contains all the typical information that will be required by the lender. The more short sales that the real estate company has performed, the more thorough the short sale package (and thus the better likelihood of a successful closing) will be, ensuring as smooth a process as possible in such an environment. While real estate markets differ from area to area, the minimal information that should be conveyed to the lender at first should contain the following:
Real Estate Short Sale - Lender Package
Once the lender has all of the information need to make a decision, it could be days, weeks, or even months before they come to a decision. So many things are going on at the bank that could delay a decision, that homeowners and buyers involved in a short sale transaction need to understand that nothing can be done without the bank’s approval. For this very reason, we advise all homeowners and prospective buyers that one of four things will happen once they have executed a contract:
- The bank may approve it and it will close
- The bank may reject it
- The bank may be unresponsive (most likely working on “the bigger picture”)
- The bank may offer a counter-proposal to the buyer (very rarely seen)
Final Advice For The Real Estate Short Sale Homeowner
If you are fortunate enough to get a bank to agree to not record a deficiency judgment after executing a real estate short sale, be prepared to work very hard to bring it to conclusion. Banks have seen it all in terms of what homeowners will do to get out of paying off a loan. They are very skeptical (rightly so) and must be convinced that the best thing for them to do is to cooperate in the short sale. This convincing is where your real estate short sale expert is crucial. Follow the advice of this article and you will have a much better chance at protecting your credit rating while also reducing the amount of money that you owe.
Once you have completed your short sale, you can take the steps necessary to rebuild your credit rating to its once strong position. The key to buying real estate in the future will be to get your FICO score (your credit rating) back into a strong, lend-able condition.
Real Estate Agent Short Sale Resources
If you are a real estate professional wanting to focus your career on helping families through this difficult process, there is a site that specializes in linking you with consumers in need of your help.
Did you know bank REO Foreclosure Department’s are paying for completed CMA’s? Did you also know Bank foreclosure department’s are bottle-necked and need your help listing foreclosures? Well, you can get the answers to all of your questions for free from the BPO/REO Industry Report! Also, find out how to get started completing BPO’s and getting paid for it!
Short Sale Video Resources
How Short Sales Work - Part I
How Short Sales Work - Part II
Top 5 Reasons Why Short Sales Crash (fail to close)
How To Buy A Short Sale
Foreclosure Alternatives - Do You Have Options?
About The Author
As Broker and Co-Owner of Century 21 First Realty, a Tallahassee Real Estate Brokerage business, Joe Manausa utilizes his MBA and 17 years of Tallahassee Real Estate experience in order to help clients with large investment opportunities while also taking the lead in growing the Century 21 First Realty operation. He contributes to multiple Web Blogs which focus on the Real Estate Market, as well as other topics important to Tallahassee, Florida. For more information on Joe and Century 21 First Realty, please visit his company website at www.manausa.com.
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